MID AMERICA APARTMENT COMMUNITIES INC. annual report, FY2016

Mid-America Apartment Communities, Inc. — FY 2016 Form 10-K

Reporting period: Year ended December 31, 2016; filed February 24, 2017. The filing covers MAA and its operating partnership, Mid-America Apartments, L.P. MAA is a multifamily REIT focused primarily on the Southeast and Southwest. The fourth-quarter figures below are unaudited.

Business context

MAA completed its merger with Post Properties on December 1, 2016. Post’s results are included for December only, while its acquired assets and liabilities are included in year-end balances. At year-end, MAA owned or had an interest in 303 apartment communities with 99,393 units. The acquired Post properties are classified as non-same-store, limiting comparability with the prior year.

Key financial and operating metrics

Metric	FY 2016	FY 2015
Total operating revenue	$1,125.3 million	$1,042.8 million
Net income	$224.4 million	$350.7 million
Net income available to common shareholders	$211.9 million	$332.3 million
Diluted earnings per share	$2.69	$4.41
Funds from operations (FFO; non-GAAP)	$463.4 million	$452.4 million
Core FFO (non-GAAP)	$490.3 million	$438.6 million
Net cash provided by operating activities	$484.0 million	$463.7 million

Revenue and property performance: Same-store revenue rose 4.2% overall (large markets +4.9%; secondary markets +3.1%). Same-store property operating expenses, excluding depreciation, increased 2.8%; same-store NOI was $611.3 million, up from $581.4 million. Portfolio physical occupancy averaged 96.2% for the year; same-store effective rent per unit increased 4.2%.
Profit and unusual items: Property NOI across the portfolio was $702.0 million. Net income declined despite higher revenue, principally reflecting a $109.6 million reduction in gains on property sales and $40.8 million of merger and integration expenses. Interest expense was $129.9 million, versus $122.3 million.
Fourth quarter: Revenue was $307.2 million versus $263.3 million in Q4 2015; net income was $42.1 million versus $45.4 million, and diluted EPS was $0.44 versus $0.57. Q4 2016 income from continuing operations before non-operating items was $43.9 million, compared with $76.8 million a year earlier.
Cash flow and investment: Investing activities used $710.5 million, including $427.8 million net cash used in the Post acquisition. Financing activities provided $222.4 million. Capital spending included $80.4 million for normal improvements, $37.3 million for renovations, and $58.9 million for development.
Debt and liquidity: Total debt was $4.50 billion, with a 3.5% weighted-average interest rate. Debt was 28.1% of total market capitalization; management also reported debt equal to approximately 33.9% of total assets. About 86.7% of debt was fixed or capped after derivatives. Cash and cash equivalents were $33.5 million, plus $88.3 million of restricted cash. The $1.0 billion revolving facility had $490 million drawn at year-end; it matures in April 2020.
Distributions: MAA paid $3.28 per common share in 2016 and declared $3.33 per share for the year. The quarterly common dividend rate was $0.87 at filing, subject to Board discretion.

Material changes versus the prior period

Revenue increased 7.9%, while net income available to common shareholders fell 36.2% and diluted EPS fell from $4.41 to $2.69. The comparison is affected by merger costs, lower property-sale gains, and the one-month contribution from Post.
Core FFO increased about 11.8% to $490.3 million; management attributed the increase mainly to revenue growth, partly offset by higher operating and corporate expenses. FFO and Core FFO are non-GAAP measures and may not be comparable with other REITs.
Year-end debt rose from $3.43 billion to $4.50 billion, and assets rose from $6.85 billion to $11.60 billion, substantially reflecting the merger. MAA issued approximately 38.0 million common shares and 868,000 Series I preferred shares in the transaction.
The same-store portfolio’s occupancy and rent trends remained strong, but the acquired Post communities will not enter the same-store portfolio until 2018.

Outlook, risks, contingencies, and unusual items

Outlook: No quantitative earnings or FFO guidance is provided in the supplied filing text. Management described apartment demand as strong and said year-end occupancy positioned the portfolio to pursue pricing in the 2017 spring leasing season. It cited merger-related opportunities to combine practices and pursue scale savings; full integration was expected within 12 months.
Development: Nine communities totaling 2,816 units were under construction at year-end, with 700 units completed. Estimated total cost was $561.8 million, of which $366.5 million had been incurred. Planned completion dates extend from Q2 2017 through Q3 2018.
Merger execution: Integration costs or delays may exceed expected savings; management flagged risks involving systems, personnel, operations, and potential unknown liabilities. The purchase-price allocation remained preliminary and subject to adjustment during the measurement period.
Legal contingency: A pre-existing DOJ lawsuit against Post, now applicable to MAA, alleges Fair Housing Act and ADA accessibility violations and seeks retrofits, injunctive relief, damages, and civil penalties. No trial date or significant settlement negotiations were reported. Aggregate accrued legal contingency losses were $42.1 million at year-end, versus $13.5 million a year earlier; the filing does not clearly allocate that balance to this case.
Principal business risks: Concentration in multifamily housing and the Southeast/Southwest, local apartment supply and rent competition, short lease terms, rising expenses and interest rates, debt refinancing and covenant exposure, catastrophe and environmental liabilities, and successful integration of Post. Management stated that environmental studies had not identified material environmental liabilities, while noting that studies may not reveal all risks.
Controls and audit: Management and the independent auditor concluded MAA’s internal control over financial reporting was effective, but the assessment and audit excluded Post’s acquired operations, representing $4.7 billion of year-end assets and $33.5 million of 2016 revenue. The independent auditor issued an unqualified opinion on the financial statements.

Most important facts for investors to verify

How post-merger operating results, same-store rent growth, occupancy, and integration savings develop once Post properties become eligible for same-store reporting.
The final Post acquisition purchase-price allocation and the total, timing, and cash impact of merger and integration costs.
Debt maturities and refinancing needs, especially the reported 2017–2020 maturities, and sensitivity to variable rates despite swaps and caps.
The status and potential exposure of the DOJ accessibility lawsuit, and the composition and adequacy of the $42.1 million aggregate legal contingency accrual.
Development completion costs, lease-up, and returns on the nine projects under construction.
Whether operating cash flow and recurring property performance support distributions and planned capital spending; reported cash balances include restricted cash that is not freely available.